Walmex. Equity Research. Best of the best flexing their muscles. BTG Pactual Global Research. Latin America Retailing Company Note 15 March 2017

Transcription

1 Equity Research BTG Pactual Global Research Walmex Best of the best flexing their muscles Encouraging takeaway from Walmex Day. What s new? There were a few positive announcements that caught our attention: (i) though 17 selling area growth guidance might ve fallen marginally short of expectations ( %), management thoroughly walked through some key initiatives that will reduce capex per sqm significantly and pointed to a robust pipeline (+21% more projects in 2016 pipeline vs. 2015, 400 potential new stores on improved distribution/logistics); (ii) their buyback program will fire back up in 2017 (P$5bn max, 0.7% yield); (iii) long term growth in Central America was revised upwards (SSS growth from 3% to 4%, selling area growth from 4% to 5%); and (iv) enhanced vertical integration and productivity should improve inventory turnover by 9 days over the long term. More granularity a positive surprise; we expect a positive reaction for the stock This commentary came as a surprise given the company's typically more measured remarks concerning guidance. We expect a positive reaction to shares as the company transparently showed why its scale and superior expertise makes it the best retail operator in Mexico, one of the key markets Walmart is best positioned to outperform Amazon globally, however we remain Neutral on valuation grounds. Updating estimates and introducing new P$43 target price; maintain Neutral We are updating our model to reflect SSS of 4.3% in Mexico for 2017, our new margin outlook which implies no expansion on continued investment in SG&A over the medium term, and the company s new selling area growth plan. Our new P$43/share price target, DCF derived and discounted at a 10.0% WACC, offers a 15% total return from current levels (including the 6.3% dividend yield expected for 2017). We are not assuming any buybacks in our model. Our 2017 EBITDA and earnings estimates are 2% and 6% below consensus, respectively. On 2017 figures Walmex is currently trading at a FCFE yield of 3.0%, a dividend yield of 6.3%, a P/E of 22.6x and an EV/EBITDA of 12.8x, the latter two being over one standard deviation above historical figures dating back to There is no doubt Walmex is a premier retailer on a global basis, but valuation leaves us on the sidelines (at our target, Walmex would be trading at 24.6x 17 earnings). Latin America Retailing Company Note 15 March 2017 Rating 12m Price Target Price Neutral MXN43.00/US$2.19 MXN39.54/US$2.01 RIC: WALMEX* MX, BBG: WALMEX* MX Trading Data and Return Forecasts 52-wk range MXN /US$ Market cap. MXN690bn/US$35,128m Shares o/s (m) 17,461.4 ADR ratio 10 ADR: 1 LOCAL Free float 30% Avg. daily volume('000 Shares) 19,004 Avg. daily value (MXN m) Forecast price appreciation +8.8% Forecast dividend yield 6.3% Forecast stock return +15.0% Stock Performance (MXN) Mar Jun Sep-14 Alvaro Garcia New York BTG Pactual US Capital LLC alvaro.garcia@btgpactual.com Dec Mar Jun Sep-15 Price Target (MXN) Stock Price (MXN) Rel. IPC 15-Dec Mar Jun Sep Dec Mar Valuation 12/ / /2017E 12/2018E 12/2019E RoIC (EBIT) % EV/EBITDA P/E Net dividend yield % Financials (MXNmn) 12/ / /2017E 12/2018E 12/2019E Revenues 475, , , , ,285 EBITDA 42,591 50,148 53,797 57,531 61,842 Net Income 23,442 28,502 29,762 31,714 34,454 EPS (MXN) Net DPS (MXN) Net (debt) / cash 11,841 14,365 2, (3,603) Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price of the year; (E) based on a share price of MXN39.54, on 14 March ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 19 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US Capital, LLC at , 601 Lexington Avenue. 57th Floor, New York NY

2 15 March 2017 page 2 Best of the best flexing their muscles Table 1: Walmex BTG Pactual Executive Summary Source: Company Data, BTG Pactual Valuation Walmex is currently trading one standard deviation above its long term historical average as can be seen in the chart s overleaf.

3 15 March 2017 page 3 Chart 1: Walmex Historical 12MF P/E Ratio (x) Source: Company Data, Bloomberg, BTG Pactual Chart 2: Walmex Historical 12MF EV/EBITDA (x) Source: Company Data, Bloomberg, BTG Pactual Main assumptions in our new DCF based valuation Our cost of equity increased from 9.8% to 10.7% on the back of higher long term MXN rates (7.50% 10yr MBONO assumption for risk free rate). This change, along with a lower FCF base on the back of the sale of Suburbia, was positively offset by the fact we rolled over our model for a March 2018 target from a YE 16 target prior.

4 15 March 2017 page 4 Long term perpetuity growth rate of 5.0% (in line with long term Food and Beverage inflation in Mexico). Long term EBITDA margin to remain in line with current levels as we have more certainty that investments in SG&A and logistics are here to stay for the long term. Table 2: Walmart Mexico DCF Valuation Analysis (P$ m) Walmex - DCF Valuation Perpetuity: 5.0% Free Cash Flows to the Firm 2016 E 2017 E 2018 E 2019 E 2020 E 2021 E 2022 E 2023 E 2024 E 2025 E 2026 E 2027 E EBIT 39,454 42,436 45,336 49,335 53,687 58,368 63,478 69,071 75,202 81,941 89,092 96,323 (-) Tax 30% 11,836 12,731 13,601 14,801 16,106 17,510 19,043 20,721 22,561 24,582 26,727 28,897 EBIAT 27,618 29,705 31,735 34,535 37,581 40,858 44,434 48,350 52,642 57,359 62,364 67,426 (+) D&A 10,694 11,361 12,196 12,507 12,798 13,051 13,275 13,466 13,617 13,721 13,733 13,605 (-) Change in NWC 12,695 (5,214) 3,074 2,136 6,874 7,725 3,422 9,426 4,498 4,910 5,167 5,175 (-) CapEx (14,335) (17,000) (19,774) (23,348) (24,414) (25,861) (23,458) (24,488) (25,596) (26,845) (25,201) (19,370) FCF to the Firm 36,672 18,852 27,231 25,830 32,838 35,773 37,673 46,754 45,161 49,145 56,064 66, % -49% 44% -5% 27% 9% 5% 24% -3% 9% 14% 19% Total Debt 13,610 13,610 13,610 13,610 13,610 13,610 13,610 13,610 13,610 13,610 13,610 13,610 Cash 27,976 16,249 14,550 10,007 10,405 11,592 12,354 19,793 23,009 27,285 35,419 24,212 Total Net Debt (Cash) (14,365) (2,639) (940) 3,603 3,205 2,018 1,256 (6,183) (9,399) (13,675) (21,809) (10,602) Market Cap Total Capitalization Cost of Debt 6.0% Cost of Equity 10.7% Debt/Total Capitalization 10.0% Equit/Total Capitalization 90.0% Tax rate 30.0% WACC 10.0% 5.0% 1,254,492 Free Cash Flow 27,231 25,830 32,838 35,773 37,673 46,754 45,161 49,145 56,064 1,321,329 Present Value of FCF's 24,752 21,342 24,662 24,421 23,377 26,371 23,154 22,903 23, ,784 Weight of FCF's 3.3% 2.9% 3.3% 3.3% 3.2% 3.6% 3.1% 3.1% 3.2% 68.6% Total Present Value 741,630 Source: Company Data, BTG Pactual Research Our 12MF (March 2018E) target priced is based on a DCF analysis discounted at a WACC of 10.0%.

5 15 March 2017 page 5 Table 3: DCF Output (P$m) Valuation DCF 741,630 Net Debt (Cash) (2,639) Equity Value 744,268 # shares (mm) 17,461 Target Price $43 Current Price $40 Upside (Downside) 8% Dividends+Repurchase 6.3% Total Upside (Downside) 14% Exit Multiple 2025E Earnings (P$m) 68, E Exit P/E Multiple (x) E Multiple Perpetuity Value (P$m) 1,236, E DCF Perpetuity Value (P$m) 1,254, E DDM Perpetuity Value (P$m) 1,469,729 Source: Company Data, BTG Pactual Research Table 4: Cost of Equity Calculation Cost of Equity Calculation Blended risk free rate 7.6% ERP 4.0% Beta 0.77 Cost of Equity 10.7% Nominal Risk Free Rate (%) EBITDA % of Total RfR % Mexico 45, % 7.5% Central America 8, % 8.0% Total 53, % 7.6% Capitalization Breakdown (%) Debt 13, % Equity 690, % Total 704, % Source: Company Data, BTG Pactual Research We provide a DDM valuation approach for Walmex in the table below, it yields an NAV/share slightly lower than our DCF. Table 5: Walmex DDM Valuation Analysis (P$ m) Notes: Assumes 100% payout ratio in 2027 for terminal value Discounted at cost of equity of 10.7% Source: Company Data, BTG Pactual Research

6 15 March 2017 page 6 Table 6: Model Summary Mexico (P$m) Mexico E 2018E 2019E 2020E EoP Units Mexico 2,357 2,291 2,371 2,454 2,563 2,670 Bodegas Aurrerá 1,719 1,763 1,824 1,892 1,977 2,062 Walmarts Sam's Clubs Superamas Suburbias Average Store Size (sqm) Mexico 2,507 2,620 2,598 2,570 2,551 2,530 Bodegas Aurrerá 1,526 1,519 1,509 1,497 1,496 1,495 Walmarts 7,765 7,733 7,663 7,616 7,570 7,535 Sam's Clubs 7,123 7,124 7,123 7,123 7,123 7,123 Superamas 1, Suburbias EoP Selling Area (sqm) Mexico 5,908,544 6,002,089 6,159,367 6,307,728 6,537,993 6,755,257 Bodegas and Discount Stores/1 2,623,671 2,677,898 2,753,076 2,832,691 2,957,710 3,082,729 Walmarts 1,987,917 2,026,106 2,092,106 2,140,106 2,218,106 2,283,106 Sam's Clubs 1,139,667 1,139,772 1,146,772 1,161,018 1,175,263 1,189,509 Superamas 154, , , , , ,248 Suburbias 446, YoY Growth (%) -5.4% 1.6% 2.6% 2.4% 3.7% 3.3% Bodegas and Discount Stores/1 2.7% 2.1% 2.8% 2.9% 4.4% 4.2% Walmarts 1.3% 1.9% 3.3% 2.3% 3.6% 2.9% Sam's Clubs 0.9% 0.0% 0.6% 1.2% 1.2% 1.2% Superamas 1.9% 0.7% 5.8% 3.9% 7.6% 7.1% Suburbias Mexico Sales 396, , , , , ,380 YoY Growth (%) 4.8% 9.1% 6.1% 5.7% 6.2% 6.2% % of Total (%) 83.4% 81.3% 81.1% 80.0% 78.9% 77.8% SSS Growth Mexico 6.4% 8.1% 4.3% 3.5% 3.5% 3.0% Growth in Selling Area Mexico -1.0% 1.6% 2.1% 2.5% 3.0% 3.5% Total Mexico (SSS + Growth in Selling Area) 5.4% 9.7% 6.4% 6.0% 6.5% 6.5% Productivity Factor Mexico Gross Profit 84,538 94,133 99, , , ,059 Gross Profit Margin 21.31% 21.74% 21.75% 21.75% 21.75% 21.75% Change in bps y/y -0.79% 0.43% 0.01% 0.0% 0.0% 0.0% YoY Growth (%) 1.0% 11.4% 6.1% 5.7% 6.2% 6.2% Operating Profit (EBIT) 28,979 33,644 36,253 38,324 41,220 44,306 operating margin 7.30% 7.77% 7.89% 7.89% 7.99% 8.09% YoY Growth (%) -5.6% 16.1% 7.8% 5.7% 7.6% 7.5% EBITDA 36,941 42,080 45,196 47,778 50,745 53,870 EBITDA margin 9.31% 9.72% 9.84% 9.84% 9.84% 9.84% YoY Growth (%) -4.1% 13.9% 7.4% 5.7% 6.2% 6.2% % of total 86.7% 83.9% 84.0% 83.0% 82.1% 81.0% Source: Company Data, BTG Pactual Research

7 15 March 2017 page 7 Table 7: Model Summary Central America (P$m) Central America Source: Company Data, BTG Pactual Research E 2018E 2019E 2020E EoP Units Central America Discount Stores + Bodegas Supermarkets Walmarts Average Store Size (sqm) Central America Discount Stores + Bodegas Supermarkets 1,381 1,373 1,373 1,374 1,374 1,374 Walmarts 5,563 5,411 5,422 5,426 5,431 5,435 EoP Selling Area (sqm) Central America 645, , , , , ,429 Discount Stores + Bodegas 375, , , , , ,989 Supermarkets 136, , , , , ,525 Walmarts 133, , , , , ,915 YoY Growth (%) 3.0% 4.3% 4.1% 3.6% 3.5% 3.3% Discount Stores + Bodegas 3.4% 6.8% 3.4% 3.7% 3.6% 3.5% Supermarkets 2.9% -7.6% 2.2% 3.2% 3.1% 3.0% Walmarts 4.9% 9.4% 7.6% 3.5% 3.4% 3.3% Central America Sales 79,118 99, , , , ,481 YoY Growth (%) 27.2% 25.8% 7.2% 13.4% 13.8% 13.7% SSS Growth Central America 4.7% 5.0% 4.0% 5.0% 5.0% 5.0% MXN Depreciation (Appreciation) vs. Central America Currency Blend 15.5% 13.9% 6.0% 0.3% 1.0% 1.0% Growth in Selling Area Central America 5.0% 3.7% 4.2% 3.8% 3.5% 3.4% Total CA (SSS + Growth in Selling Area + FX) 25.2% 22.5% 14.2% 9.1% 9.5% 9.4% Productivity Factor Central America Gross Profit 18,064 23,351 25,029 28,384 32,296 36,710 gross profit margin 22.83% 23.46% 23.46% 23.46% 23.46% 23.46% Change in bps y/y 0.44% 0.63% 0.00% 0.0% 0.0% 0.0% YoY Growth (%) 29.7% 7.2% 13.4% 13.8% 13.7% Operating Profit (EBIT) 3,851 5,811 6,182 7,011 8,115 9,381 operating margin 4.87% 5.84% 5.79% 5.79% 5.89% 5.99% YoY Growth (%) 33.8% 6.4% 13.4% 15.7% 15.6% EBITDA 5,651 8,067 8,601 9,754 11,098 12,614 EBITDA margin 7.14% 8.10% 8.06% 8.06% 8.06% 8.06% YoY Growth (%) 30.6% 6.6% 13.4% 13.8% 13.7% % of total 13.3% 16.1% 16.0% 17.0% 17.9% 19.0%

8 15 March 2017 page 8 Table 8: Model Summary Consolidated (P$m) Consolidated E 2018E 2019E 2020E EOP Selling Area (m2) 6,554,527 6,675,878 6,860,510 7,033,966 7,289,326 7,531,686 YoY Growth (%) -4.6% 1.9% 2.8% 2.5% 3.6% 3.3% Average Selling Area (m2) 6,714,319 6,615,203 6,768,194 6,947,238 7,161,646 7,410,506 YoY Growth (%) -0.4% -1.5% 2.3% 2.6% 3.1% 3.5% Mexico Sales 396, , , , , ,380 % of Total 83.4% 81.3% 81.1% 80.0% 78.9% 77.8% Central America Sales 79,118 99, , , , ,481 % of Total 16.6% 18.7% 18.9% 20.0% 21.1% 22.2% Consolidation Adjustment (0) % of total sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% TOTAL SALES 475, , , , , ,861 YoY Growth (%) 7.9% 11.9% 6.3% 7.2% 7.7% 7.7% Seasonality Gross Profit 102, , , , , ,769 gross profit margin 21.6% 22.07% 22.07% 22.09% 22.11% 22.13% Change in bps y/y -0.58% 0.51% 0.01% 0.02% 0.02% 0.02% Operating Profit (EBIT) 32,828 39,454 42,436 45,336 49,335 53,687 operating margin 6.9% 7.4% 7.5% 7.5% 7.6% 7.6% YoY Growth (%) -5.4% 20.2% 7.6% 6.8% 8.8% 8.8% EBITDA 42,591 50,148 53,797 57,531 61,842 66,485 EBITDA margin 8.95% 9.42% 9.51% 9.49% 9.47% 9.45% YoY Growth (%) -0.6% 17.7% 7.3% 6.9% 7.5% 7.5% DIVIDENDS PAID/SHARE REPURCHASE 33,387 28,972 43,304 27,217 28,541 30,525 Annualized dividend payout (% of cash earnings) 87.1% 79.5% 101.3% 65.0% 65.0% 65.0% Dividends per share Shares oustanding 17,461 17,461 17,461 17,461 17,461 17,461 Source: Company Data, BTG Pactual

9 15 March 2017 page 9 Table 9: New Estimates vs. Bloomberg Consensus vs. Old BTG Pactual Source: BTG Pactual, Bloomberg

10 15 March 2017 page 10 Selling area growth, capex and capital allocation Key points on selling area: Selling area growth is expected to be % in 2017, while capex is expected to rise +19% YoY to P$17bn New logistics initiatives and distribution centers (vertically integrating meat processing and cold fruit ripening plants key examples here) allows for Walmex to open 400 potential new stores which they were previously unavailable to open as they were too costly to supply on logistics front as they were too far away o At maturity, the US$1.3bn investment in enhanced logistics network (announced in December of last year) should reduce the weighted averaged distance to stores by 40% There are 21% more projects in 2016 pipeline vs and this pipeline should continue to accelerate 2016 new store openings performing 8% better than expected New projects today in terms at percentage of completion stand at much higher levels (80%) vs last year (41%) - mainly on more efficient licensing Aurrera express now opens in 7/8 months as opposed to 1.5 years and returns 40bps higher YoY Bodega Aurrera 130bps higher ROIC YoY Most importantly, Walmex spent a great deal of time and detail on how they are making great strides in making the cost of opening a store more efficient. They are higher more contractors, seeing the fruits of all the effort put into improving licensing processes (licensing for current year delivery significantly greater than last year), and, along with better inventory management, focusing on new prototypes with smaller warehouse space which reduces overhead capex for new stores is flat YoY in absolute terms despite growing selling area at a faster pace and expansion capex per sqm of new stores is coming down to 28.5 from 33.1 last year and 36.7 the year prior. At the same time, sales per sqm are increasing +20% in new Bodega stores, one of the key drivers behind Walmex s increase in ROIC. Table 10: Breakdown of capex for new stores Source: Company Data

11 15 March 2017 page 11 Chart 3: Capex per sqm new stores (P$k) Chart 4: Capex per new store (P$m) Source: Company Data Source: Company Data Chart 5: Summary of new Walmex prototypes Source: Company Data On the new prototypes, management spent a great deal of time on the new Superama Proto C which has much higher potential than regular Suburbia in terms of selling area growth (73% higher capex efficiency) and will have similar price points to Walmart Supercenter and cater to more of the B/C socioeconomic segment. Management is not worried about cannibalizing Walmart Supercenter s (at least not for the time being) and compared this format to the Walmart Neighborhood Market in the US. Lastly, on capital allocation, Walmex is set to approve P$5bn in potential buybacks which represent a 0.7% yield. We view this as a positive. Management mentioned they are also cautious about keeping the float of the company at healthy levels (currently slightly under 30%).

12 15 March 2017 page 12 ecommerce Our take on Walmex s ecommerce offering Before we get into some of the key points discussed on ecommerce, our general impression is that while Walmex is in a unique position to leverage its strong brand power and customer loyalty in Mexico to leverage its ecommerce business, we fear that lack of investment in the last mile and inferior delivery to competition might hamper their longer term competitive positioning vs. Amazon. Walmex s value proposition today involves a promise to deliver product in 5-11 days which is far better than the market average but Amazon has now launched a delivery promise of 2 days. Delivery time and ease is the biggest differentiator in ecommerce (especially in items such as appliances, where Walmex saw 60% growth in this past Buen Fin and this, in our view, is something Amazon could potentially start eating away at) and we would like to see Walmex set more aggressive targets in this regard. Walmex will continue to focus on its marketplace offering which currently has great traction and is growing at above market average rates. Our key question here is: what good is it to invest heavily in marketplace today when the real threat is last mile in the future? Key points on ecommerce: In 2016 Walmex launched new apps and new websites in Mexico s five largest cities ecommerce grew 27% in 2016 while the market grew 20% El Buen Fin (Mexico s Black Friday in November) grew 50% YoY in 2016 o o +60% YoY growth in appliances 55% of orders we shipped in first 100 hours Conversion rate of 3.7% for Walmex websites Innovating with curbside pickup model which no other competitor has implemented 70% of Bodega customers have smartphones Superama and Walmart Supercenter leading the way Margins: Run, Fix, Grow better explains lack of operating leverage in Mexico Pedro Farah (CFO) spent a great deal of time talking about the importance of investing in growth for the future (not capex, on the P&L) which we agree is an important part of the SSS outperformance we have seen from Walmex. However, a big pushback from investors is why we have not seen better margins in Mexico with robust high single digit SSS. Mr. Farah provided better color on this with a new breakdown labeled Run, Fix, Grow describing the different impacts seen in margins in 2016:

13 15 March 2017 page 13 Run: this is the natural margin improvement seen from higher SSS (operating leverage) alongside other key initiatives such as vertical upstreaming in meat and staffing by volume (lowering staff levels at stores with less volume) Fix: closing stores and one-off costs regarding slipups which are normal course of business Grow: Lower margins at new stores and key investments in ecomemrce and logistics which are reflected on the P&L. Essentially, Fix and Grow are eating into all of Run for the time being and although we acknowledge this investment is key to spurring SSS growth, we are not giving Walmex the benefit of the doubt on being able to change this trend and expand margins in the future. Central America We are encouraged by the uptick in longer term growth guidance (SSS growth from 3% to 4%, selling area growth from 4% to 5%). In particular, the selling area growth figure of 5% makes more sense in a market as underpenetrated as Central America. Margin improvements in 2016 drove an increase of 100bps in ROIC for this operation. Initiatives continue to be private label (much higher penetration than Mexico), leveraging Walmart s global scale to compete with informal sector on price more effectively and vertical integration. Some more notes from Walmex Day: Key category and selling space distribution initiatives Perishables Biggest and most talked about initiative was vertical integration in the protein space, particularly meats. This centralized distribution of meat is being implemented first in Bodega's given the cost focus and benefits this produces (has already been implemented in 300 stores). All packaging is facilitated by inventory initiatives where meat arrives ready to be packaged in store (whereas before suppliers would leave a more complicated/more costly product in store for Walmex to work through). Their own produce can stay fresh up to 14 days, 8 days on average. New initiative at Walmart Supercenter involves a better layout (fruits and vegetables are now positioned diagonally as opposed to vertically allowing for better viewing of produce). Bakery: Frozen, Frozen, Frozen Across the portfolio but particularly at Walmart and Sams there has been a big push towards implementing frozen bakery processing. Essentially it is much more efficient from a cost standpoint but you can still offer the same

14 15 March 2017 page 14 value proposition to the client (maintain good bakery smell to induce traffic and still high quality product) More space for clothing, perishables and H&W Taking away from furniture items and adding to clothing (especially kids clothing), and perishables Better feedback from clients 130k different surveys conducted every month done at a store level - all digitalized, managers are able to review them the day after Performance metrics now more standardized and more specific Better customer experience New wifi offering in all formats continues to be rolled out with great success. According to the company, 70% of bodega customers own a smartphone and a lot of them are always hunting for wifi. Makes customers feel at home. Better productivity Investment in supply chain and logistics should reduce transportation cost, increase quality (fill rates from suppliers are structurally low in Mexico), reduce processing at the store and this should ultimately lead to 9 days less of inventory turnover Staff by volume: less staff in stores with less traffic LED light initiative has driven 390kw per store per year savings in costs Eliminated use of paper, everything is digitalized Key inventory replenishment hours are 8am, 12pm and 5pm - one hour before peak traffic hours to ensure product is there Key points per format Bodega Bodega Aurrera has reduced prototypes by 800 sqm and has increased sales per sqm by 20% Continued focus on private label where they can find some spots of opportunity (saw key staples such as sardines under private label brand at store entrance) Sam's Club Turnaround is over, now it's time to accelerate the business

15 15 March 2017 page 15 Walmex set out in 2015 to double member base by 2019, this goal is very much in reach and they are well on their way October 2016 saw membership fees increase and there was no slowdown, members have responded positively New Sam's club to open in Barranca del Muerto this year (2017) Salmon flown in from Chile (sample tasted great) for Sam's Club Health and Wellness big focus at Sam's club. The pharmacy section which used to be separate will now be included in this section and key OTC products (working directly with P&G) will be more visible to centralize this strategy. Huge opportunity to service Infrastructure for small business in Mexico there is no Cysco or food service/restaurant supplier specialists in Mexico and Sam s fills that role Club Pick Up traffic encouraging since launch, see pictures of station below:

16 15 March 2017 page 16 Chart 6: Club Pick Up Station at Sam s Club Source: Sam s Club

17 15 March 2017 page 17 Chart 7: Club Pick Up at Sam s Club Merchandise Ready for Pick Up Source: Sam s Club

18 Walmex 15 March 2017 page 18 Wal mex Income Statement (MXNmn) 12/ / / / / /2017E 12/2018E 12/2019E Revenue 418, , , , , , , ,285 Operating expenses (ex depn) (376,987) (384,950) (398,100) (433,093) (482,040) (512,131) (548,931) (591,442) EBITDA (BTG Pactual) 40,792 40,221 43,995 42,591 50,148 53,797 57,531 61,842 Depreciation (8,393) (8,690) (9,279) (9,763) (10,694) (11,361) (12,196) (12,507) Operating income (EBIT, BTG Pactual) 32,399 31,532 34,716 32,828 39,454 42,436 45,336 49,335 Other income & associates Net Interest 387 (69) (216) (84) (724) (518) (668) (808) Abnormal items (pre-tax) Profit before tax 32,798 31,517 34,562 32,917 39,132 41,918 44,668 48,527 Tax (9,637) (9,517) (9,521) (9,473) (10,623) (12,156) (12,954) (14,073) Profit after tax 23,162 22,000 25,041 23,445 28,509 29,762 31,714 34,454 Abnormal items (post-tax) ,394 2,935 4, Minorities / pref dividends 7 4 (9) (3) (7) Net Income (local GAAP) 23,168 22,717 30,426 26,376 33,344 30,512 31,714 34,454 Adjusted Net Income 23,168 22,004 25,032 23,442 28,502 29,762 31,714 34,454 Tax rate (%) Per Share 12/ / / / / /2017E 12/2018E 12/2019E EPS (local GAAP) EPS (BTG Pactual) Net DPS BVPS Cash Flow (MXNmn) 12/ / / / / /2017E 12/2018E 12/2019E Net Income 23,168 22,004 25,032 23,442 28,502 29,762 31,714 34,454 Depreciation 8,393 8,690 9,279 9,763 10,694 11,361 12,196 12,507 Net change in working capital (2,703) (3,790) 12,981 (4,033) 12,695 (5,214) 3,074 2,136 Other (operating) 3,633 (3,572) (7,825) 6,590 (15,131) (1,849) (2,360) (2,559) Net cash from operations 32,492 24,044 44,862 38,696 41,603 34,810 44,624 46,538 Cash from investing activities (9,090) (12,396) (14,193) (13,989) (16,821) (3,000) (19,774) (23,348) Cash from financing activities (14,366) (18,534) (26,475) (33,699) (28,312) (43,304) (27,217) (28,541) Bal sheet chge in cash & equivalents 2,997 (7,034) 6,918 (3,257) 3,185 (11,727) (1,699) (4,543) Balance Sheet (MXNmn) 12/ / / / / /2017E 12/2018E 12/2019E Cash and equivalents 28,163 21,129 28,048 24,791 27,976 16,249 14,550 10,007 Other current assets 50,484 61,520 62,404 60,058 64,418 71,885 75,670 81,453 Total current assets 78,647 82,649 90,452 84,849 92,394 88,134 90,220 91,460 Net tangible fixed assets 117, , , , , , , ,408 Net intangible fixed assets 26,261 26,530 29,559 38,579 47,558 49,698 51,438 53,238 Investments / other assets ,629 12,152 12,578 13,018 Total assets 222, , , , , , , ,124 Trade payables & other ST liabilities 61,556 64,871 74,836 76,753 93,424 95, , ,344 Short term debt Total current liabilities 62,164 65,721 75,528 77,309 93,957 95, , ,344 Long term debt 12,639 13,247 12,570 12,394 13,077 13,610 13,610 13,610 Other long term liabilities 7,647 8,343 7,737 12,127 13,870 14,495 15,002 15,527 Total liabilities 82,449 87,312 95, , , , , ,481 Equity & minority interests 139, , , , , , , ,643 Total liabilities & equities 222, , , , , , , ,124 Company Profile: Wal-Mart de México, S.A.B. de C.V. (WALMEX) is a Mexican retail chain operator. The Company operates self-service stores and warehouse membership clubs through four main formats (Bodega, Walmart Supercenter, Sam's Club, Superama). In February 2010, the Company acquired Walmart Centroamerica. The principal shareholder of WALMEX is Wal-Mart Stores, Inc., through Intersalt, S. de R.L. de C.V. Financial ratios 12/ / /2017E 12/2018E 12/2019E EBITDA margin 8.9% 9.4% 9.5% 9.5% 9.5% Operating margin 6.9% 7.4% 7.5% 7.5% 7.6% Net margin 4.9% 5.4% 5.3% 5.2% 5.3% RoE 15.5% 17.9% 17.8% 18.6% 19.6% RoIC 23.8% 27.0% 26.7% 26.9% 27.9% EBITDA / net interest 506.0x 69.3x 103.9x 86.1x 76.5x Net debt / EBITDA -0.3x -0.3x -0.0x -0.0x 0.1x Total debt / EBITDA 0.3x 0.3x 0.3x 0.2x 0.2x Net debt / (net debt + equity) -8.5% -9.4% -1.6% -0.5% 2.0% Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(e) based on share price as of 14 March 2017

19 15 March 2017 page 19 Required Disclosures This report has been prepared by BTG Pactual US Capital LLC. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. BTG Pactual Rating Buy Neutral Sell Definition Coverage *1 IB Services *2 Expected total return 10% above the company s sector average. Expected total return between +10% and -10% the company s sector average. Expected total return 10% below the company s sector average. 50% 50% 45% 40% 5% 40% 1: Percentage of companies under coverage globally within the 12-month rating category. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Absolute return requirements Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 50% must be rated Buy Analyst Certification Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to BTG Pactual US or its affiliates, as the case may be; (ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein. The research analyst responsible for this report is registered/qualified as a research analysts by FINRA. It is possible that research analysts contributing to this report are employed by a non-us broker-dealer. In this case the analysts will not be registered/qualified as research analysts under FINRA rules and therefore will not be subject to the restrictions contained in the FINRA rules regarding communications with a subject company, public appearances, and financial interest in the securities of the subject company. Part of the analyst compensation comes from the profits of BTG Pactual US or its affiliates as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by BTG Pactual US or its affiliates. Statement of Risk Wal-mart de Mexico, S.A.B. de C.V. [MXWALM] (Primary) - In addition to volatile equity markets, these companies face risks from macroeconomic conditions in the country (including exchange rate, inflation, tax rates, personal consumption and wage levels, as well as financial conditions within the country) and from the execution of their own business plans, including their expansion programs, competitive pressures and technological change. Valuation Methodology Wal-mart de Mexico, S.A.B. de C.V. [MXWALM] (Primary) - Our Discounted Cash Flow-based target price for Wal-Mart de Mexico is Ps$43, discounted at a Weighted Average Cost of Capital of 9.9%. The Weighted Average Cost of Capital is comprised of a cost of debt of 6.0% and a cost of equity of 10.6% (with a 10% debt to capital ratio). Company Disclosures Company Name Reuters 12-mo rating Price Price date Walmex 1, 2, 4, 6, 18, 19, 20 WALMEX* MX Neutral MXN Within the past 12 months, BTG Pactual US or its affiliates has received compensation for investment banking services from this company/entity. 2. BTG Pactual US or its affiliates expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. 4. This company/entity is, or within the past 12 months has been, a client of BTG Pactual US or its affiliates, and investment banking services are being, or have been, provided. 6. BTG Pactual US and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity. 18. As of the end of the month immediately preceding the date of publication of this report, neither BTG Pactual US nor its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities. 19. Neither BTG Pactual US nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company. 20. Neither BTG Pactual US nor its affiliates or subsidiaries engaged in market making activities in the subject company s securities at the time this research was report was published.

20 15 March 2017 page 20 Walmex 50.0 Stock Price (MXN) Price Target (MXN) Buy Neutral Sell No Rating 15-Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar-17 Source: BTG Pactual and Economatica. Prices as of 14 March 2017

21 15 March 2017 page 21 Global Disclaimer This report has been prepared by BTG Pactual US Capital LLC ( BTG Pactual US, ), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation, and BTG Pactual US is distributing this report in the United States. BTG Pactual US is an affiliate of Banco BTG Pactual S.A, a Brazilian regulated bank, responsible for the distribution of this report in Brazil. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US at , 601 Lexington Ave. 57th Floor, New York, NY This report is being distributed in the United Kingdom and elsewhere in the European Economic Area ( EEA ) by BTG Pactual Europe LLP ( BTG Pactual UK ), which is authorized and regulated by the Financial Conduct Authority of the United Kingdom. This report may also be distributed in the United Kingdom and elsewhere in the EEA by BTG Pactual S.A. and/or BTG Pactual US. BTG Pactual UK has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the recommendation, or (iv) disseminated this report prior to its issue by BTG Pactual US. BTG Pactual UK does not distribute summaries of research produced by BTG Pactual US. BTG Pactual Chile S.A. Corredores de Bolsa ( BTG Pactual Chile ), formerly known as Celfin Capital S.A. Corredores de Bolsa, a Chilean broker dealer registered with Superintendencia Valores Y Seguros (SVS) in Chile and responsible for the distribution of this report in Chile and BTG Pactual Perú S.A. Sociedad Agente de Bolsa ( BTG Pactual Peru ), formerly known as Celfin Capital S.A. Sociedad Agente de Bolsa, registered with Superintendencia de Mercado de Valores (SMV) of Peru, is responsible for the distribution of this report in Peru. BTG Pactual Chile and BTG Pactual Peru acquisition by BTG Pactual S.A. was approved by the Brazilian Central Bank on November 14th, BTG Pactual S.A. Comisionista de Bolsa ( BTG Pactual Colombia ) formerly known as Bolsa y Renta S.A. Comisionista de Bolsa, is a Colombian broker dealer register with the Superintendencia Financeira de Colombia. BTG Pactual Colombia acquisition by BTG Pactual S.A. was approved by Brazilian Central Bank on December 21st, References herein to BTG Pactual include Banco BTG Pactual S.A., BTG Pactual US Capital LLC, BTG Pactual Europe LLP, BTG Pactual Chile, BTG Pactual Peru and BTG Pactual Colombia. This report is for distribution only under such circumstances as may be permitted by applicable law. This report is not directed at you if BTG Pactual is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that BTG Pactual is permitted to provide research material concerning investments to you under relevant legislation and regulations. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation, offer, invitation or inducement to buy or sell any securities or related financial instruments in any jurisdiction. Prices in this report are believed to be reliable as of the date on which this report was issued and are derived from one or more of the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market for the security in question; (iii) other public sources believed to be reliable; or (iv) BTG Pactual 's proprietary data or data available to BTG Pactual. All other information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Banco BTG Pactual S.A., its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. In all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are analyzed in this report. BTG Pactual does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. BTG Pactual accepts no fiduciary duties to recipients of this report and in communicating this report is not acting in a fiduciary capacity. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which the report was issued and are therefore subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of BTG Pactual as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, Banco BTG Pactual S.A., its subsidiaries and affiliates may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. Any such opinions, estimates, and projections must not be construed as a representation that the matters referred to therein will occur. Prices and availability of financial instruments are indicative only and subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of BTG Pactual Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. BTG Pactual is under no obligation to update or keep current the information contained herein, except when terminating coverage of the companies discussed in the report. BTG Pactual relies on information barriers to control the flow of information contained in one or more areas within BTG Pactual, into other areas, units, groups or affiliates of BTG Pactual. The compensation of the analyst who prepared this report is determined by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of BTG Pactual Investment Bank as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. If a financial instrument is denominated in a currency other than an investor s currency, a change in rates of exchange may adversely affect the value or price of or the income derived from any security or related instrument mentioned in this report, and the reader of this report assumes any currency risk. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision on the basis of the information contained herein. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither BTG Pactual nor any of its affiliates, nor any of their respective directors, employees or agents, accepts any liability for any loss or damage arising out of the use of all or any part of this report. Notwithstanding any other statement in this report, BTG Pactual UK does not seek to exclude or restrict any duty or liability that it may have to a client under the regulatory system in the UK (as such term is defined in the rules of the Financial Conduct Authority). Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have been effected at those prices and any prices do not necessarily reflect BTG Pactual internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions, by BTG Pactual S.A., BTG Pactual US, BTG Pactual UK, BTG Pactual Chile and BTG Pactual Peru and Bolsa y Renta S.A. or any other source, may yield substantially different results. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of BTG Pactual and BTG Pactual accepts no liability whatsoever for the actions of third parties in this respect. Additional information relating to the financial instruments discussed in this report is available upon request. BTG Pactual and its affiliates have in place arrangements to manage conflicts of interest that may arise between them and their respective clients and among their different clients. BTG Pactual and its affiliates are involved in a full range of financial and related services including banking, investment banking and the provision of investment services. As such, any of BTG Pactual or its affiliates may have a material interest or a conflict of interest in any services provided to clients by BTG Pactual or such affiliate. Business areas within BTG Pactual and among its affiliates operate independently of each other and restrict access by the particular individual(s) responsible for handling client affairs to certain areas of information where this is necessary in order to manage conflicts of interest or material interests. Any of BTG Pactual and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently amended this report prior to publication; (b) give investment advice or provide other services to another person about or concerning any securities that are discussed in this report, which advice may not necessarily be consistent with or similar to the information in this report; (c) trade (or have traded) for its own account (or for or on behalf of clients), have either a long or short position in the securities that are discussed in this report (and may buy or sell such securities), with the securities that are discussed in this report; and/or (d) buy and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, which units may reference securities that are discussed in this report. United Kingdom and EEA: Where this report is disseminated in the United Kingdom or elsewhere in the EEA by BTG Pactual UK, this report is issued by BTG Pactual UK only to, and is directed by BTG Pactual UK at, those who are the intended recipients of this report. This report has been classified as investment research and should not be considered a form of advertisement or financial promotion under the provisions of FSMA 2000 (Sect. 21(8)). Dubai: This research report does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, Emirates Securities and Commodities Authority or the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE. The content of this report has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority. United Arab Emirates Residents: This research report, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates and accordingly should not be construed as such. The securities are only being offered to a limited number of sophisticated investors in the UAE who (a) are willing and able to conduct an independent investigation of the risks involved in an investment in such securities, and (b) upon their specific request. The securities have not been approved by or licensed or registered with the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the UAE. This research report is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee's consideration thereof). No transaction will be concluded in the UAE and any enquiries regarding the securities should be made with BTG Pactual CTVM S.A. at , Avenida Brigadeiro Faria Lima, 3477, 14th floor, São Paulo, SP, Brazil,